Tuesday, August 9, 2016

Summers on growth and stimulus

Larry Summers has an important, and 95% excellent, Financial Times column. Larry is especially worth listening to. I can't imagine that if not a main Hilary Clinton adviser he will surely be an eminence grise on its economic policies. He's saying loud and clear what they are, so far, not: Focus on growth.

The title "the progressive case" for growth, is interesting enough. Perhaps Larry now uses the word "progressive" to describe himself. More importantly, Larry's audience here is the Clinton campaign and the Democratic party. He's saying loud and clear: you're not paying enough attention to growth, and growth ought to be at the center of the party, and the new Administration's, economic plans.

...many people, in their eagerness to focus on fairness, neglect the single most important determinant of almost every aspect of economic performance: the rate of growth of total income,

Hooray. Not only is this vitally important and factually correct, a growth oriented policy, if sold without the usual demonization, could well attract bipartisan support. That sentence could come from Paul Ryan's a better way

Alas, Larry blows that spirit right off the bat with a sentence that take a gold medal for convoluted calumny and bombastic bulverism:

Because those who champion strategies that centre on business tax-cutting and deregulation and favour the wealthy have placed the most emphasis on growth over the past 35 years, the objective of increasing growth has been discredited in the minds of too many progressives.

Translated into something approximating English: because people whose only and base motive was "favoring the wealthy" happened to advocate growth to sell their (as later described) useless tax-cutting and deregulation strategies, the goal of growth has become tarnished in the minds of good progressives.

This is below Larry -- in person I have always known him to recognize that conservatives and free-marketers have exactly the same dispassionate goal, advocate growth primarily to help the less well off, and tax-cutting and deregulation as time-proven policies that improve growth. But, again, his audience is to the left, so perhaps one can excuse some I-hear-you agreeing with common demonizations.

But then he gets to well written and praiseworthy work, so good I must quote it in entirety:

It can hardly be an accident that the decades of maximum growth, the 1960s and 1990s, also saw the most rapid job growth and most rapid increase in middle-class living standards.

Growth provides the wherewithal for increased federal revenue and so encourages the protection of vital social insurance programmes such as Social Security and Medicare....

Tight labour markets are the best social programme, as they force employers to hire and mentor inexperienced people in order to be adequately staffed. Some years ago, I estimated that for each 1 per cent point increase in adult male employment, the employment of young black men rose 7 per cent. More recent research confirms economic growth has an outsized benefit for younger people and minorities.

Rising growth has other benefits, as well. It strengthens the power of the American example in the world. It obviates the need for desperation monetary policies that risk future financial stability. Greater growth also has historically operated to reduce crime, encourage environmental protection and contributes to public optimism about the country that our children will inherit.

The reality is that if American growth continues to have a 2 per cent ceiling, it is doubtful that we will achieve any of our major national objectives.

If, on the other hand, we can boost growth to 3 per cent, interest rates will normalise, middle-class wages will rise faster than inflation, debt burdens will tend to melt away and the power of the American example will be greatly enhanced.

...the vast majority of job creation and income growth comes from the private sector. If the next president is lucky enough to oversee the creation of 10m jobs from 2017-20, more than 8m of them will surely come from businesses hiring in response to profit opportunities.

All true, excellent, well-stated, and bipartisan (at least for the pre-Trump era). Jeb Bush's 4%, Paul Ryan's opportunity society agree totally. Heck, even Gary Johnson might find little to quibble with here. If growth could be the mantra for the Hilary Clinton administration, and if Larry can persuade his fellow "progressives," great things could follow.

And now to the remaining 5%:

There is no case for reducing already low corporate taxes or removing regulations unless it can be shown that these have costs in excess of benefits.

What is needed is more demand for the product of business. This is the core of the case for policy approaches to raising public investment, increasing workers’ purchasing power and promoting competitiveness.

No case? Really? The higher taxes, steadily more convoluted tax code, vast expansion of regulation (Dodd-Frank, Obamacare are just the start) that coincided with our epic slow growth, have nothing at all to do with that sorry experience? There is absolutely nothing wrong with the microeconomics of the American economy and its vast administrative, judicial and regulatory state, we just need a bit more "demand?"

Leave aside the last 30 years of growth theory, which is silent on "demand," we can do nothing better than move around 1970s era IS and LM curves, and revive ideas from the 1930s?

Read the second paragraph carefully. "More demand" is the ""core of the case for policy approaches to raising public investment, increasing workers’ purchasing power and promoting competitiveness."

That "more demand" is the "core of the case" for (The Federal Government to borrow a lot of money and spend it on things labeled as) "public investment" admits up front that the actual value of such investment is at best secondary. Public investment in a great Ice Wall of Westeros on the southern border, or for high-speed trains from Tonopah to Winemucca, do just as well in boosting "demand."

What is needed is a serious negotiation: Fund needed infrastructure investment, but put in serious cost-benefit analysis, buy it at reasonable prices, and so forth. That negotiation should start by abandoning the whole idea that we're doing it to provide "jobs" and "demand." If you're not wiling to do that, at least be honest and state that Mr. Trump's wall provides the same "demand."

Then explain to us how Japan has been at this for 20 years, producing no great shakes of growth.

"policy-approaches to... increasing worker's purchasing power" is another classic hidden-subject clause. I presume it means [The Federal Government, by legislation, regulation, or threat, will force companies to pay workers more, and then control employment to make sure those companies don't just fire workers or select better ones in order to ] increase [some] worker's purchasing power." Gary Johson's program also increases worker's purchasing power, and I don't think that's what Larry has in mind. I'm also curious where in modern economics forced transfers increase employment and long-run growth.

But in context, this is a small complaint. If Larry can persuade Mrs. Clinton and the "progressives" in the Democratic Party to focus on growth, to state goals for growth, and to hold themselves accountable for growth, then we can have an honest and very productive conversation about what's stopping growth and what steps can further it.

37 comments:

I concur with Prof. Cochrane's analysis except that I would add that Summers seems to be arguing that state-enforced equality not only has no costs in terms of lost economic efficiency but is necessary for economic growth. This is apparently the new Democratic Party doctrine. Politicians love a free lunch!

what is the liberal argument against revenue neutral tax reform (simpler but same revenue w/o dynamic scoring)? Is it just a lost opportunity to raise taxes? I also question does he truly believe more infrastructure and a higher minimum wage are better growth strategies than more immigration (all skill), criminal justice reform (decriminalizing weed, ending 3 strikes, ending mandatory minimums, clearing records for non violent offenders could unleash a ton of workers by getting them out of the insane traps), occupational licensing reform (more nurses please) and zoning reform (how is any of this "conservative" or "liberal"? As a non-interventionist if he's up there saying let's shift xBillion from overseas actions (I think it's time to withdraw from Japan, seriously) into building hospitals, colleges and day car centers in the US, i'm on board, but do we really need the bridge = prosperity nonsense?

I think James is right. Many progressives now seem to view taxes not as a necessary evil needed to finance the federal government, but rather as a tool to equalize incomes and discourage rich people from earning beyond a certain amount(see Piketty).

The liberal argument against a regressive revenue neutral tax reform would be based on the relative marginal utility of income for rich people versus poor people:-Maximizing social utility demands progressive tax rates due to declining marginal utility of money.-Declining marginal utility of money also means that rich people would be less disincentivized by high tax rates than poor or middle class people. (Does Bill Gates work for money?)

I find these points to be non-controversial. Do you? After that, it's a matter of picking the numbers, but it should be extremely easy to see why regressive revenue-neutral tax reform doesn't get a lot of traction.

Here's where the growth comes from: 70% of our economy is consumer spending. Let's reverse the income redistribution that has sent virtually all income gains to the top 1%. Put more money in the pockets of the middle and lower middle through infrastructure employment, tax policies, wage hikes. That will put money where it will be spent, increasing demand and growth.

No one ever spends half a second to think about where all that top 1 income goes. Even if its spent on long weekends at the golf course, or yachts, or on luxury cars: All of those businesses employ middle and lower income workers. Its not like the money vanishes into gold encrusted vaults and then burried into the ocean.

The 1960s is the best peacetime decade for economic growth, a GDP 3x greater than what we have today. The Vietnam War buildup did not start until mid-1965 and the big years for the buildup were 1967 through 1970; after 1970 was the peak year and the decline in troop strength went down.﻿

The late 1960s were the closest thing to full employment that we had since WWII. During the 1960s long-term unemployment hardly existed -- approximtely 0.25% of workforce, less than half of what it has been since -- most people unemployed during the 1960s was 4-months or less.

Speaking of excessive demand, I think there is some inflation in your claim that you agree with 95% of what Summers is saying. I think you are trying too hard not to sound like Brad Delong, who calls everyone who disagrees with him a moron. But you don't have rep for being nasty, even among those who disagree with you. So you could probably say Summers got maybe 20% right by your lights and still seem a gentleman.

I still remember the time I saw Summers debate Hubbard, devastating the poor guy with unfair metaphors. "The patient just got smoked by an 18 wheeler and is bleeding all over the highway and you want to lecture him on his cholesterol?" Yeah, that is what Hubbard is trying to say. Good point, Larry.

I agreed with Summers going in but came away thinking there has to be some way that Hubbard was right about something. All my conservative friends liked Summers, I assumed only because he had out-glowered Hubbard and these middle aged guys got fooled by the "force" of his personality.

Just because a metaphor is bombastic doesn't mean it's unfair. There are things that could be reasonably compared to the bleeding-patient thing -- for example, if Hubbard said that the main drag on post-2008 US economic growth was inefficient investment in green energy, then the metaphor is perfectly accurate.

[PS. I don't know if the metaphor was fair or not, but your example leaves out the crucial context. You seem to think that just because the metaphor is vivid and violent it must be unfair]

My only mental connection to Larry Summers is from the movie "The Social Network" and specifically his interaction with the Winklevoss twins. This excerpt from a Fortune Magazine conference interview regarding that interaction is quite entertaining.

MR. ISAACSON: So was that scene in The Social Network true?

DR. SUMMERS: I've heard it said that I can be arrogant.

DR. SUMMERS: If that's true, I surely was on that occasion. One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o'clock, there are two possibilities. One is that they're looking for a job and have an interview; the other is that they are an asshole.

DR. SUMMERS: This was the latter case. Rarely, have I encountered such swagger, and I tried to respond in kind.

I'm not clear why there is any reason to get excited about the idea the Democrats might be persuaded to focus on growth if their methods of doing so are flawed and counter-productive such as wasteful "stimulus spending" and no reduction of regulations. What matters is the actions they propose to effect change, not what the claimed goals of their actions are.

re: "What is needed is more demand for the product of business."

It is unfortunate that they don't seem to grasp that the private economy is constantly dreaming up ways to increase demand for whatever product they wish to sell. The products the economy will spend money on change over time, such as during a downturn when demand may switch to lower priced products. Changes in demand require investment expenditure on the part of companies to adapt to the changed demand, whether its R&D for a new product, or capital expenditure to build up a new company selling a new product that is put into production that consumers will prefer since its cheaper or for an existing low cost provider to expand further. Adaptation to changing demand expends resources, including adapting to changed demand during a slow economy or downturn to try to increase demand. Government attempts to tinker during to "increase demand" via stimulus instead borrow or tax steer resources away from where the private sector would choose to be expending resources to adapt to the changed demand. It is like seeing a sick patient whose body is using resources to heal itself, and telling them "we need you on your feet, so go and run a few miles and you'll be fine", and leaving them worse off than before.

Temporary spending stimulus spending leads to resources expended on essentially "friction" costs since the resources are used up for the economy to adapt to the changed demand profile during the stimulus, and then to adapt to the demand profile after the stimulus.

I am confused about the federal nature of Larry's infrastructure-as-stimulus proposal. The federal government does not really spend that large a percentage of GDP, or even its budget on infrastructure. Rather, infrastructure is primarily bought by lower levels of government---even some specially-created bodies, especially here in california, that are only semi-democratic. The department of transportation only has a budget of about $80-100 billion, and some of that goes to operations, research, data collection---i.e., services. So even if you doubled it to like $160 billion, it wouldn't be a big deficit booster, and in fact a lot would be offset by lower governments withdrawing their spending: why fix your own roads when the federal government will do it for you? Also, the federal government does not really have the institutional capacity to do tons of cost-benefit analysis on transportation; most of that money is allocated by formula. If they tried to spend an extra few hundred billion on particular projects, I think it would all be pork.

I am also confused about the economic priorities here. Don't we need much higher fuel taxes? Paying for a bunch of infrastructure out of general fund borrowing is the opposite policy. We also need to convert more of our infrastructure into a user fee system, as with the HOT lanes that are proliferating today.

States and local governments do have a ton of worthwhile investments they can make on their own, provided that they can borrow. Self-funding is also good, because then the governments have some skin-in-the-game, and they will design policies supported by other policies they are undertaking, and they already have long-range plans.

Therefore, what I think might be better would be for the federal government to borrow a lot and then buy up some big share of the municipal and state debt market---enough to lower muni rates. I think there is like 5 trillion of outstanding muni debt. They would even turn a profit on that transaction most likely, given how diversified the portfolio would be. Moreover, since muni interest payments are tax deductible, the operation would kind of be doubly-profitable.

No. A bulverism attacks the motivations of the person making an argument. To point out one has made such an argument is the opposite of a bulverism: it attacks the nature of the argument itself, and is silent on the motivation.

Well, this is not enough. You guys have to qualify growth, otherwise you will just catapult us back into the 20th century, and we can't go on like this forever... there are limits to the system, simply ignoring them is not a solution...

The economy can grow while becoming less resource intensive. GDP values things by what you pay for them. We're moving to electronics, information, and services. If GDP triples, but it's all better health care and internet services, the planet will be fine.

"It can hardly be an accident that the decades of maximum growth, the 1960s and 1990s, also saw the most rapid job growth and most rapid increase in middle-class living standards."

We can agree about the 1960s. But Summers is wrong about the 1990s --- the 1980s were far better, at least if we define "middle class living standards" by something like median household income per capita. This was established in Wolff, Zacharias and Masterson, “Trends in American living standards and inequality”, Review of Income and Wealth, series 58, number 2, June, pages 197-232, 2012. They used what they called the Levy Institute Measure of Economic Wellbeing (LIMEW) which allows for taxes, transfers, public consumption, and household production. They did not emphasise this conclusion themselves but on analysis I showed that this stands out clearly[ http://cep.lse.ac.uk/pubs/download/occasional/op030.pdf ]. The LIMEW standardised for household size and composition rose by 3.22 per year over 1982-89 but by only 0.97% per year over 1989-2000.

The 1980s were not a great era for productivity but they were for living standards. Of course in the long run living standards can only grow if per capita GDP grows. But in the short/medium run they can diverge.

It is remarkable that American economists don't seem to have noticed how well the middle class did under Reagan (even allowing for the Volcker deflation). Maybe that was one reason why he was so popular?

more demand for the products of business? Okay, imagine that all automobiles were mysteriously swept up in a tornado and deposited at bottom of ocean. Then the purchase of replacement vehicles would constitute a lot of products of business. Then isn't this the reason why replacing the carbon power platform with an affordable, renewable, efficiently consumed clean power platform would be the way to (a) save the global climate and (b) create a lot of new demand for the products of business?

Why would I think that Hillary Clinton would recognize a pro-growth policy even if she wanted one? She seems more likely to saddle the local bodega with 500 extra pages of regulations on the grounds that expert advice will improve efficiency.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!